Global Economics

Fancy Another Merger, Mate?


Australia is white-hot M&A territory, with outfits from Qantas to Coles Group on the block. Thank solid growth and a positive business environment

Here's a refreshing change: a remarkable business story in Asia that has nothing to do with China and India. When it comes to merger and acquisition activity in 2007 the real center of gravity is, surprisingly, much farther south; in Australia, a country better known globally for its cultural exports Nicole Kidman and Russell Crowe than for its 15-year run of uninterrupted growth and its claim to one of the highest living standards on the planet.

Those global private equity sharpies, whose deal-making synapses are firing 24/7 these days, have clearly figured this out—and that is creating an uneasy feeling among ordinary Australians and lawmakers in Canberra. Australian companies were the target of some 470 deals—worth about $33.7 billion—by local and foreign acquirers during the first quarter of 2007. That ranks the country as the No. 1 deal-making haven in Asia and the 11th most active worldwide, according to data released on Apr. 4 by Thomson Financial TOC.

Just consider some of the testosterone-fueled bidding wars currently in play Down Under. First there's the battle for Coles Group, the nation's second biggest retailer. An investor posse led by Australian industrial conglomerate Wesfarmers, and backed by the acquisitive local investment bank Macquarie Bank and Europe's Permira on Apr. 3 made a A$16.47 ($13.41) per share offer that values the retailer at about $16 billion. That would be the biggest deal ever in Australia.

Targeting Qantas

It's also well above a rejected bid made last October by another investment consortium led by Kohlberg Kravis Roberts and other global buyout firms."If KKR gets back into the game with another bid "…you could get to a A$20 ($16.26) share offer," says Tony Pearce, a fund manager with Legg Mason Asset Management in Melbourne.

The other takeover melodrama of the moment involves one of Australia's most famous business brands—Qantas Airways. It's a profitable international airline with a 65% domestic market share and is the target of a nearly $9 billion offer from a group of international investors led by Australia's Macquarie that includes private equity giant Texas Pacific Group, Canada's Onex, and the Allco Finance Group.

However in late March Balanced Equity Management, a Melbourne-based fund and 4% owner of Qantas shares, formally rejected the A$5.45 ($4.39) per share or $8.6 billion deal in a letter to the airline, suggesting it would take a richer price to get its approval (see BusinessWeek.com, 3/23/07, "Qantas Bid Hits an Air Pocket").

Supplying China

Australian investment bank Babcock & Brown and Singapore Power have a pending deal to spend $6 billion to acquire gas pipeline and electricity network concern Alinta 2000. However the acquisition machine Macquarie, Australia's biggest investment bank, could make a counter-bid.

What's driving the deal mania? In part, it is one of the longest runs of non-stop prosperity in Australian history. This $743 billion economy exports all manner of natural resources such as coal and iron ore—both in huge demand by China. The economy—which clocked 2.7% last year—is expected to grow 2.8% this year and 3.3% in 2008, according to Standard & Poor's, which like BusinessWeek is a unit of the McGraw-Hill Cos. (MHP).

The country boasts low government debt and a prospering middle class, and a host of reforms made back in the 1980s—such as reducing high tariffs and floating the Australian dollar—have resulted in a well-balanced and competitive economy. "Australia has a long history of reforms that have promoted greater competition and productivity growth and bolstered the economy's resilience to major shocks," S&P analyst Kyran Curry noted in report published in December. Also, global dealmakers like transacting business in Australia, given the quality of the country's financial accounting.

Raising Some Eyebrows

Is the sort of private equity backlash that hit other Asian economies such as South Korea and Japan, and even Britain, next up for Australia? Pearce, the fund manager with Legg Mason Asset Management in Melbourne, thinks the current wave of deals is driven by the robust cashflow that a lot of domestic companies are generating.

He doesn't see a huge political blow-back against takeovers of some of the most storied brands in Australia just yet. That could change if a big debt-fueled deal bankrolled by foreign capital went very bad, leading to massive layoffs or outright failure. While that's unlikely to happen to a well-run company like Qantas, the heavy debt load likely to be assumed by the investment team proposing to take over the airliner has raised some eyebrows. Back in November, when the bid for Qantas was made public, S&P placed the airliner on its credit-watch list "with negative implications."

Yet right now at least, the deal mania continues unchecked on a continent that is definitely in a groove.

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.

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